Saturday, December 29, 2012

New home sales increased to 377,000 in November and are on pace to increase 18%+ in 2012. This was a solid annual increase, and yet sales are still very weak - 2012 will be the 3rd lowest year for New Home sales since the Census Bureau started tracking new home sales in 1963. So there is still plenty of upside for new home sales over the next few years.

Case-Shiller house prices were up 4.3% year-over-year in October, and will probably be up around 6% for the year. And the 4-week average of initial weekly unemployment claims declined to the lowest level of the year - and the lowest since early 2008.

Consumer confidence was weak (future expectations), and there were some reports of retail sales being below expectations, but overall the data was decent.

Of course the economic headlines were about the "fiscal cliff" negotiations. There is no cliff (more of a slope), and there is no drop dead date - but policymakers do need to reach an agreement soon.

Here is a summary of last week in graphs:

• New Home Sales at 377,000 SAAR in November

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 377 thousand. This was up from a revised 361 thousand SAAR in October (revised down from 368 thousand). Sales for August and September were revised up slightly.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was just above the record low in November. The combined total of completed and under construction is also just above the record low since "under construction" is starting to increase.

New home sales have averaged 363 thousand SAAR through November 2012, up sharply from the 307 thousand sales in 2011. Also sales are finally at the lows for previous recessions too.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.0% from the peak, and up 0.6% in October (SA). The Composite 10 is up 4.8% from the post bubble low set in March (SA).

The Composite 20 index is off 30.3% from the peak, and up 0.7% (SA) in October. The Composite 20 is up 5.4% from the post-bubble low set in March (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 3.4% compared to October 2011.

The Composite 20 SA is up 4.3% compared to October 2011. This was the fifth consecutive month with a year-over-year gain since 2010 (when the tax credit boosted prices temporarily).

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 17 of the 20 Case-Shiller cities in October seasonally adjusted (also 12 of 20 cities increased NSA). Prices in Las Vegas are off 58.0% from the peak, and prices in Dallas only off 4.6% from the peak. Note that the red column (cumulative decline through October 2012) is above previous declines for all cities.

This was slightly above the consensus forecast for a 4.1% YoY increase.

Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.

The graph shows the quarterly Case-Shiller National Index SA (through Q3 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to January 2001.

In real terms, most of the appreciation in the last decade is gone.

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to August 2000 levels, and the CoreLogic index is back to February 2001.

In real terms - and as a price-to-rent ratio - prices are mostly back to 1999 or early 2000 levels.